What is the fintech ecosystem

On the way to a FinTech ecosystem

The German market for FinTechs is increasingly entering a phase of maturity. Higher investments, more expansions abroad and increasing cooperation are the result. Investors are increasingly relying on established startups.

The trend towards digitization has permanently changed our everyday life and the corporate world. Banks and savings banks are recorded later than other sectors, but no less violently. The Bank Blog contains the latest studies on this important topic.

The auditing and consulting company EY has presented its annual study on the development of the German FinTech segment. The number of FinTechs in Germany seems to be stabilizing. In the first half of 2018, only six start-ups were counted after 22 in the previous year as a whole. Taking into account failed business models, the overall market only grew by two companies to 303 FinTechs.

Investments in startups in the financial sector increased by 12 percent in the first nine months compared to 2017 and amount to 477 million euros. At the end of the year, the experts expect 636 million euros. However, the number of deals is likely to be lower than the 67 deals from the previous year. 49 deals have been made so far.

Competition causes the onset of consolidation

The existing companies concentrate on the further development of their business models and internationalization. The aim is to strengthen the competition and build a larger customer base.

FinTech startups are under pressure from two sides:

  • Domestic from traditional financial institutions that have waited a long time, but are now increasingly relying on new technologies themselves.
  • From abroad through new competitors who are pushing their way into the German market, which is attractive because of its sheer size and economic strength.

Berlin, Frankfurt and Munich largest FinTech locations

The German FinTechs are mainly distributed among the cities of Berlin (81 FinTechs), Frankfurt / Rhein-Main-Region (74) and Munich (48).

According to the authors of the study, around a third of the existing FinTechs - around 100 - have already dared to leap across the border into foreign markets. Conversely, estimates suggest that around 84 FinTechs based abroad are active on the German market.

German-speaking countries in particular - Austria and Switzerland - are of particular interest to many FinTechs because they can offer their solutions to a larger number of customers without language barriers. In addition, the competition in many markets is not yet as tough as in Germany.

N26 and Deposit Solutions with high financing rounds

Younger, not yet established, FinTechs have a much more difficult time. Investors prefer to wait and see whether the business model proves itself. - Christopher Schmitz, EY

Above all, the FinTechs already established in the market were able to arouse the interest of investors in Germany: N26 secured the largest financing rounds with 130 million euros and the open banking platform Deposit Solutions with 88 million euros.

In addition, the successful IPO of the SME financier creditshelf was a signal to other FinTechs to take advantage of the favorable capital market environment.

FinTechs in the B2C area in particular, i.e. in business with private individuals, are facing challenges, because two thirds of the failed FinTechs in the past three years have been here.

The reason is that many established financial service providers have built up well-branched, functioning structures in the private customer business. In addition, they are increasingly investing in digitization themselves and generally have more resources than new competitors. The chances of success are made more difficult by the fact that it is very expensive to build up a sufficiently large customer base. In addition, many business models primarily serve niches and cannot simply be expanded to a larger mass or to foreign markets.

On the way to the digital financial ecosystem

Many FinTechs are therefore looking to work with large institutes. These are increasingly willing to cooperate, as they often do not have the appropriate digital solutions themselves. There are no longer any of Germany's top ten banks that do not cooperate in some way with a FinTech. Two - Deutsche Bank and ING-DiBa - have each already taken over a FinTech.

The market is on the way to a FinTech ecosystem. The increasing networking is positive for the market as a whole. Support from established institutes helps start-ups to grow. The banks, in turn, benefit from know-how that they do not have themselves.

Sooner or later, however, this dynamic will lead to a consolidation. For start-ups that do not succeed in convincing investors or partners, the strong competition will soon mean the end.

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